The Myth of America’s Golden Age

Cautiously and belatedly, some six years after the fact, the Obama administration has now begun to revise its views about the Great Recession. Even Geithner, in his book, agrees that more should have been done. But hey, resources were scarce, and one had to make bets where they would be most effective. That’s the point: Listening to the bankers, it’s not a surprise that he placed his money on the bankers. Even before Obama took office, I urged a greater emphasis on homeowners: that we should combine at least a little trickle-up economics with trickle-down economics. But those of my persuasion were given short shrift, as the administration sought counsel from the vested interests in the financial sector.

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The Obamians seem bewildered that the country is not more thankful to its government for having prevented another Great Depression. They saved the banks, and in doing so, they saved the economy from a once-in-a-hundred-year storm. And they proudly point out that all the money given to the financial sector has been more than repaid. But in making such claims, they ignore some critical realities: It was not something that just happened. It was the result of reckless behavior, the predictable and predicted consequences of deregulation and the inadequate enforcement of the regulations that remained, of buying into the mind-set of the 1 percent and the bankers—for which Geithner and his mentor, former White House economic adviser Larry Summers, had more than a little culpability. It was as if, after an accident caused by drunk driving, in which the last drink was served by the police officer on duty, the drunk driver was put back into the driver’s seat, his car rushed to the repair shop, while the victim was left to languish at the scene of the crime.

The repayment itself is, at least in part, the result of a game that would do any con man proud. The government, under the auspices of the Federal Reserve, lends money to the bank at a near-zero interest rate. The bank then lends it back to the government at 2 or 3 percent, and the “profit” is paid back to the government in repayment of the “investment” the government made. Bank officials, meanwhile, get a bonus for the hefty returns they have “earned” for the bank—something a 12-year-old could have done. This is capitalism? In a true rule-of-law world, a drunk driver would have to pay for not only his own repair costs but also the damage he has inflicted—in this case, the cumulative loss of GDP, which now amounts to more than $8 trillion, and which is mounting at the rate of $2 trillion a year. The banks recover, while the typical American’s income plummets to levels not seen in two decades. It is understandable why there might be some anger in the body politic.

What we have here is not, as administration officials would have it, a failure to communicate. The problem was that Americans saw what they were doing. There was a healthy debate in the country about alternative courses of action—before, during and after the bailouts. The reason critics like Sheila Bair, Elizabeth Warren, Neil Barofsky, Simon Johnson, Paul Krugman and others (left, right and center) won the day—at least the intellectual debate and the war over public perceptions—was not that they were better communicators. It was that they had a more convincing message: There were alternative ways of rescuing the economy that were fairer and that would have resulted in a stronger economy. Instead, our politics and economics are now locked into a vicious circle: Economic inequality leads to political inequality, and this political inequality then leads to rewriting the rules to increase the level of economic inequality even further, and so on. The result? Ever greater disillusionment with our democracy.

Matters may well get worse. Recent research has uncovered a variety of other vicious cycles. Poverty traps mean those in the bottom remain there. The fortunes of a child of poor parents who does well in school are far bleaker than those of a child of rich parents who does much more poorly in school. About a quarter of U.S. college freshmen from the bottom income half finish college by age 24, compared with 90 percent of the upper quartile. And with wages of those who have only a high school diploma at 62 percent of the typical college grad’s earnings—compared with 81 percent in 1965—the prospects are they will be poorer than their parents.

Joseph Stiglitz (far right) with his family in Gary. | Courtesy of Eloise Stiglitz

Meanwhile, lower taxes on capital and lower inheritance taxes are allowing the accumulation of inherited wealth—in effect, the creation of a new American plutocracy. It is even possible, as I pointed out long ago in my Ph.D. thesis and as Piketty has emphasized, that wealth will be increasingly concentrated among a select few. The shared prosperity that marked the country in that golden age of my youth—in which every group saw its income growing but those at the bottom saw it rise the fastest—is long gone.

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Yet I am, perhaps, naive enough to believe it is not capitalism alone that is at fault: It is, even more, the paralysis of our politics and the banishing of any progressive thought from a debate that still pretends the No. 1 problem is government. I have spent my career as an economist second-guessing markets, demonstrating their imperfections, and yet markets can be a powerful force for increasing standards of living for all. But we need a balance of the kind we achieved in the middle of the 20th century, when government was afforded a progressive role. Otherwise, I fear, we will permanently scar ourselves with the rigged economic and political system that already has done so much to create today’s inequality.

When I was growing up in Gary during its own smog-choked “golden age,” it was impossible to see where the city was going. We didn’t know, or talk, about the deindustrialization of America, which was about to occur. I didn’t realize, in other words, that the rather grim reality I was leaving behind was actually as good as Gary was ever going to get.

I fear America could be at the same place today.

Joseph Stiglitz, a Nobel laureate, is University professor of finance and economics at Columbia University.